HP buying 3Com in $2.7 billion blockbuster

Strengthens HP’s data center and Ethernet switch offerings vs. Cisco and partners, opens opportunities in China

HP has announced it is buying 3Com for $2.7 billion in a deal that combines leaders in switching, routing, security and more. It also should boost HP's presence in China, where 3Com is strong.

HP Wednesday said it is acquiring 3Com for $2.7 billion, 30 years after Ethernet creator Robert Metcalfe co-founded the company. The acquisition will fill out HP's data center product portfolio with switches, routers and security products, plus expand its presence in China.

Under the cash transaction, HP will pay $7.90 per 3Com share. The terms of the transaction have been approved by the HP and 3Com boards of directors.

The companies hope their combined entity will give Cisco a run-for-the-money in data center networking and convergence.

"Companies are looking for ways to break free from the business limitations imposed by a networking paradigm that has been dominated by a single vendor," said Dave Donatelli, HP’s executive vice president and general manager, Enterprise Servers and Networking, in a statement. "By combining HP ProCurve offerings with 3Com’s extensive set of solutions, we will enable customers to build a next-generation network infrastructure that supports customer needs from the edge of the network to the heart of the data center."

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3Com recently re-entered the North America large enterprise switching stage after years of focusing on China. The company boasts a wide array of switching platforms – from workgroup, to wiring closet edge to deep data center core – after acquiring the whole of a joint venture it had with Huawei called H3C.

HP, meanwhile, has been lacking a core data center switch for some time. Its data center-optimized switching lineup consists of a top-of-rack 24-port 10Gbps Ethernet switch called the ProCurve 6600, and the 6120 series blade switches.

In a recent Network World interview, HP’s Marius Haas (SVP and GM of the ProCurve Networking business) hinted strongly that HP would solve its lack of a core data center switch via the acquisition route:

"You can assume I'm looking at everything [buying and building]. I view the window of opportunity for us as now. The customer base is saying it wants us to step up now. So we're looking at everything - build, partner, buy. What's the best investment profile from a return standpoint, not just for our share holders but for our customers? So you should assume that's the pragmatic approach I'm taking."

Indeed, HP says it will run its global business and next-generation data centers entirely on the new networking platforms obtained from 3Com, as well as its own, soon after completion of the acquisition.

"It gives HP a core switch -- a brand-new core switch," says Steve Schuchart of Current Analysis of 3Com's H3C 12500, which the company is pitting against Cisco's Nexus 7000."It gives them a real platform to move forward with," Schuchart says, adding that the HP ProCurve 8212 and 5400 series switches didn't really cut the mustard for core applications. "This is newer, bigger and a much more purpose built switch."A brief history of 3Com3Com will also give HP some enterprise edge routers. The MSR line features a Linux-based server blade for running open source applications like IP PBX, security and WAN optimization, much like Cisco's wildly successful ISR series platforms.There will be considerable overlap, however, at the low-end of both companies’ switching lines, Schuchart notes. HP will have to rationalize that and base its decisions on which product line is newer and more feature-laden. "Whoever has newer/faster/better/more will get the nod," he says.

In addition to significantly broadening its own networking portfolio, the acquisition of 3Com will strengthen HP’s position in China, one of the world’s fastest-growing markets. It will also add a research and development team in China.

"Bottom line, I think this is 75% about geographic market acquisition [in China in particular] and 25% about product acquisition," says Rob Whiteley of Forrester Research."The most valuable 3Com asset is the H3C joint venture and $700M in revenue in China," Whiteley says. "So this is a great push for HP to do more business in China in general."

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3Com also brings to HP network security capabilities through its TippingPoint product line. Approximately 30% of the Fortune 1000 companies have already deployed TippingPoint intrusion prevention systems, the companies say."TippingPoint gives them a great IPS and tremendous asset to more tightly integrate with the 'smart infrastructure' that HP is building," he says.

ProCurve had a lot of partnerships on the security front and very little native technology, Whiteley notes.

HP also gets a VoIP product line in the 3Com NBX and VCX IP PBX and handset lines. 3Com has less than .5% share of the total $16 billion enterprise telephony market however, according to Dell'Oro Group; but that's still more than the 0% HP has, which up to now addressed the market through partnerships with Avaya and Microsoft, among others.There will also be considerable overlap in wireless LANs, Schuchart says. 3Com has an OEM arrangement with Trapeze Networks but HP bought Colubris a couple of years ago. Naturally, HP is expected to continue on with the Colubris product line.

On the increased competition with Cisco, which just unveiled a big joint venture with EMC and VMware that's focused on one-stop shopping for the data center, Whiteley says: "The gloves are off and these two will make great competitors in the long run. I'm still confused about some of the whitespace (i.e. video, collaboration, and mobile carrier infrastructure) that are still big gaps where HP falls short from Cisco. However, HP will be building a credible alternative to [Cisco’s Unified Computing System (UCS)],  which is where a lot of the action is in datacenters right now."

The acquisition is subject to customary closing conditions, including the receipt of domestic and foreign regulatory approvals and the approval of 3Com’s stockholders. The transaction is expected to close in the first half of calendar 2010.

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